Developers Compelled to Defer SEZ Leasing Due to Legislative Delays

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SEZ Leasing Getting Delayed

According to industry experts, the delay in replacing the Special Economic Zones (SEZ) Act of 2005 with the Development (Enterprise and Services) Hubs Bill of 2022 is affecting the rental collection of large office parks as corporations are hesitant to lease space in SEZ parks. Developers hoped that de-notifying vacant spaces and leasing them to domestic enterprises would help reduce vacancies.

The DLF SEZ portfolio has maintained a vacancy rate of 15%, while the non-SEZ portfolio's vacancy rate has fallen to 6%. According to a report by ICICI securities, global macro headwinds in the form of rising interest rates and a slowdown in tech MNC recruiting have slowed large leasing decisions since January 2023.

In addition, the atmosphere has been dampened by the delayed implementation of the DESH Bill and the issuance of new notices of intent to vacate by a few large tenants for FY24 during the period of January to March 2023. "As a consequence, all the office REIT administrators - Embassy, Mindspace and Brookfield - have refrained from giving distribution guidance for FY24 given the dubious near-term outlook. While REITs may underperform in the short term, the factors fueling this underperformance may reverse by 2025, according to a report by ICICI securities.

This is due in part to the conversion of SEZ space to non-SEZ space.

The provisions of the DESH Bill are intended to enable developers to attract new tenants to SEZs. The Bill is crucial for occupants in SEZ zones, as they seek clarity in the event of expiring tenancies, while developers may face increasing vacancies in the event of further delays. Any clarity on Bill movement and specific clauses will help occupiers plan future leases and allow developers to consider the future course of action to sustain occupancies.